INVESTORS are reversing bets on interest rate cuts after Reserve Bank governor Gill Marcus said on Friday that they should not assume policymakers would lower borrowing costs to spur economic growth.

Two-year interest rate swaps rose three basis points on Thursday to 5.148 percent, the highest since the benchmark rate was lowered to 5 percent on July 19. Swaps for similarly-rated Russia dropped two points on the same day.

Surging fuel costs and a weaker rand have stoked inflation, threatening the Reserve Bank’s 3 percent to 6 percent target. Marcus is trying to keep price pressures under control while supporting an economy that is set to expand at its slowest pace since a 2009 recession.

Investors could not assume the central bank would “automatically” cut rates again, given rising inflation risks, Marcus said last week.

“She’s reiterating that the last rate cut shouldn’t be seen as the start of a cycle,” Nedbank Group head of strategic research Mohammed Nalla said on Thursday. “The market was aggressively pricing in a rate cut, and now it’s starting to catch up with reality.”

Forward-rate agreements starting in a year climbed six basis points on Thursday to 5.11 percent, the highest since July 18. The rate increased higher than the Johannesburg Interbank Agreed Rate for the first time since August as traders started pricing in the possibility of a rate increase within the next year.

The yield on 13.5 percent bonds due September 2015 dropped one basis point to close at 5.47 percent on the day.

Policymakers remained ready to act in “whatever way is necessary”, Marcus said, adding that the Reserve Bank’s primary responsibility was to control inflation.

“It shouldn’t be seen as foregone that we would automatically react to stimulus in relation to growth when you have inflation issues that seem to be coming through,” Marcus said.

Inflation has been stoked by the rand’s 3.6 percent slump against the dollar in the past three months. The currency was bid at R8.7340 to the dollar at 5pm on Friday, 7.63c weaker than the day before.

The inflation rate rose for a second month to 5.5 percent in September from 5 percent in the previous month.

The yield gap between five-year fixed-rate bonds and similar-maturity inflation-linked debt, known as the inflation break-even rate, jumped 30 basis points to 5.62 percentage points since September 20, when the Monetary Policy Committee left borrowing costs unchanged.

The outlook for the economy has deteriorated as the worst labour unrest in the mining industry since the 1980s slashed exports, curbing growth at a time when Europe’s debt crisis cuts demand for manufactured goods.

The Reserve Bank has lowered its growth forecast three times this year to 2.6 percent. The economy expanded 3.1 percent last year.

That slowdown meant another rate cut could not be ruled out even as inflation approached the upper limit of the target range, Standard Bank head of macro research Thabi Leoka said.

The bank forecasts a 50 basis point rate cut in January.

“We think the forward-rates market is too negative” on the prospects for a rate cut, Leoka said on Thursday. There were a lot of factors the central bank needed to consider, “including growth concerns”, she said

The cost of insuring dollar debt using credit-default swaps has climbed 20 basis points since the mining strikes began on August 10. –